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12 Dec 2014

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When will Chinese buyers return?Chinese flag

That is question on dairy traders’ lips the world over. Some take the view that they will come back in Spring, as they inevitably must come back. China is only 70-80% self-sufficient, and with further domestic food safety scandals (TB infected cows on a large dairy’s farm whose milk went into the food chain), Chinese consumers’ confidence in domestic products has taken another knock.
The fact is that China is not entirely out of the market – just buying much, much less than 12 months ago. Recent reports of powder imports into China make very interesting reading.
Reflecting historically high WMP imports in 2013, October 14 levels were down 72% to just over 15,000t. To get a sense of perspective, the first quarter of 2014 saw imports totalling 100,000t – and the past 2 months only added up to 20,000t.
By contrast, SMP imports in October were slightly higher than WMP, for the first time in over 3 years, at just under 16,000t. For all that, this was 28% less than the same month last year.
China is also importing whey, albeit 14% less in October 2014 than the same month last year at 30,800t.
When China starts buying in earnest, it is fair to assume they will not go back to the extraordinary high purchases of 2013/early 2014. However, increased activity from Chinese buyers over the coming months will have a huge impact on market sentiment globally.

 
Ireland increasing sales of SMP to China
October Chinese SMP import figures suggest that while the US market share has fallen from 34% to 25%, and NZ has gone from 42% to 34%, Irish exporters have grown theirs from 1% to 16% of SMP imports!

 
What about product availability and prices in Russia?
Cheese imports have fallen by around 37% in 2014, but this has not led to an equivalent shortage. This is mainly due to increases in domestic production.
There are also reports that imports of cheese from South America have replaced at least some of this, but that as prices are high, consumers are buying less.
General inflation has increased to over 8% in recent months, and food inflation has been reported at around 25% – with the price of some foods, including some dairy products, having increased by double that.

 
European prices weaker, but Euro makes exports competitive
Average EU dairy commodity prices reported by Member States for 7th December, and published this week by the EU Milk Market Observatory suggest that, after some apparent stabilisation in the previous couple of weeks, further weakness is creeping into EU commodity prices.

EU average prices 7th Dec 2014

Based on: EU MMO

Returns from those product prices, before processing costs, are around 33c/l (see tables below).

returns 7th dec 2014Based on: EU MMO

 

IDB PPI falls to lowest level in over 2 years
The IDB PPI lost 3.3 points in November, falling from 102.8 points to 99.5 points.  This is the lowest level reached since mid 2012, and is lower than the base of 2010.  While the IDB predicts possible further cuts, this will obviously depend on market factors.

 

IDB ppi - Nov 2014

 

Source: IDB

 

Against those negative trends, there are more mixed signals coming from spot milk price trends, with Dutch spot milk prices easing again after a small rally, while Italian spot prices hold their own (see graphs below)

spot mlk prices 7th Dec 2014

Also, while the prices are poor, European products are performing relatively well on export, as the weak Euro makes them more competitive. From peak in May 14 to current exchange rate, the Euro lost over 10% against the US Dollar, and from March 2014 todate lost 5.3% against Sterling.

USD exch rate

Stg exch rate

Source: x-rates.com

 
Why are  Irish milk price are more volatile than other EU ?
It is surprising and frankly disappointing that Irish milk prices have returned firmly to the lower half of the LTO European milk price league. Farmers are entitled to ask why this might be?
In the last couple of years, major efforts and investments have been made by co-ops and the Irish dairy board to increase the value added to our product mix, with the development of specialist powders, whey protein products, infant formulae and sports and neutraceutical innovations and functional foods all getting top billing in co-op presentations to farmers.
For the last two years, Bord Bia has worked actively with the Irish Dairy Board and the rest of the industry to develop a dairy focused Origin Green identity to strengthen our industry’s sustainability credentials on global markets.
And this effort has been supported in the last 12 months by farmers engaging with the Bord Bia sustainability audits to back Origin Green Dairy with measurable facts. Still, it seems that our prices are more volatile than most other member states, falling further when markets weakened (see graph below)

LTO oct 2014Source: LTO Netherlands

It is particularly shocking to see that not only have they fallen by more than most other Member States, the only MS to have registered more severe milk prices over the last 12 months are the Baltic States, which took the brunt of the Russian ban. (see graph below).

milk price evolution to Sept 14

Source: EU MMO

 
These are questions our industry must address.
Irish farmers need to see a return on their co-ops’ very real investments and efforts, which must translate into access to better markets, with improved, more sustainable milk prices less susceptible to extreme volatility.

 
IDF 2014 World Market Situation Report examines the main dairy exporters’ share of global market
New Zealand, unsurprisingly has the greatest share of the global export market, at over 25%, while Europe and the US each contribute between 15 and 25% of global trade. Australia, despite its struggles against drought in recent years, still accounts for between 5 and 15% of trade, while South America, plagued by weather and economic issues, contributes less than 5%.

IDF map

Source: IDF

CL/IFA/12th December, 2014

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